With consumers encouraged to shelter-in-place as much as possible and online shopping at Amazon making that easy to do, small businesses are feeling the crunch during the coronavirus pandemic.
Additionally, millions of Americans have lost their jobs during the pandemic, which has led to a shortage of discretionary income to spend at small businesses.
To help keep small businesses afloat during this pandemic that has also turned into a recession, the United States federal government launched the Paycheck Protection Program (PPP). PPP provides small business loans that are “designed to provide a direct incentive for small businesses to keep their workers on the payroll.”
If a small business receives a PPP loan and uses the majority of it for employee payroll and other eligible expenses like rent, the loan becomes a grant and the federal government forgives all debts related to the loan.
This program is certainly a terrific idea and has helped a great number of small businesses throughout the country, but not every business has been able to get their hands on one.
PPP only can provide loans within its appropriated budget so each application is reviewed by the government and either rejected or approved for funding. Unfortunately, this has meant some small businesses have been denied this financial lifeline and are left searching for other forms of financing to stay afloat during this challenging time.
LendEDU, a financial services company, breaks down a few of those financing alternatives for small business owners below.
Home Equity Loan
If a small business owner also happens to be a homeowner, then he or she could always consider tapping into their home equity to take out a home equity loan to help fund their enterprise.
Home equity is the difference between the value of a home and what’s still owed on it from the mortgage. A homeowner who is also a business owner can access that difference in the form of a cash loan that often comes at a low-interest rate because the loan is secured by the house.
While this financing option should be considered by small business owners, it’s important to remember their home is acting as collateral and they could potentially lose that home if they are unable to pay the home equity loan back.
Peer-to-peer lending, sometimes known as P2P lending or crowd-lending, a relatively new form of financing that matches potential borrowers, like small business owners, with individuals who are willing to lend the money the former needs.
In the case of a small business owner applying for a P2P loan, his or her loan request, credit score, and other information are reviewed by individual investors in an online marketplace, who either agree or disagree with offering the terms requested. The small business owner then reviews the various loan offers and decides on the one they feel is best.
P2P loans are often unsecured, which means the interest rate will typically be higher than that on a home equity loan, but it’s still a great outside-the-box financing option for small business owners to consider.
Business Line of Credit
One other form of financing for small business owners to consider is a business line of credit, which is probably the most traditional option included in this article.
A business line of credit works very similarly to a credit card in that a small business owner is provided a credit line by a financial institution that the former can draw upon at any time. There is a stated credit line maximum that the business can borrow against and pay back over time.
And like a credit card, available credit will decrease the more a small business owner borrows. In terms of repayment, there is usually no set monthly payment with this option, but just a minimum payment required each month based on how much has been borrowed.
This is a good financing option for small business owners that will need flexible and ongoing access to cash, which is quite relevant during the coronavirus pandemic when seasonal slumps have seemingly become year-round.
A business line of credit will typically come with a higher interest rate, and borrowers should be wary about drawing upon this credit too often and then only making the minimum payment each month.
In his role at LendEDU, Mike Brown uses data, usually from surveys and publicly-available resources, to identify emerging personal finance trends and tell unique stories. Mike’s work, featured in major outlets like The Wall Street Journal and The Washington Post, provides consumers with a personal finance measuring stick and can help them make informed finance decisions.
CTA: LendEDU helps people compare and learn about student loans, personal loans, mortgages, home equity loans, credit cards, insurance, small business loans, and more. At LendEDU, our goal is to help consumers and business owners make educated decisions when it comes to financial products and strategies without having to do all the legwork themselves.